- What are the common ISA mistakes that can be avoided by savers and investors?
- How to get savvy with fees and charges
- ISAs are a powerful way to build up wealth
- It only takes a few steps to get more from these accounts
Dan Coatsworth, head of markets at AJ Bell, comments:
“ISAs are a savers or investors’ best friend, acting as a place to build up wealth and shelter all the gains from the taxman. But even the savviest investor can succumb to mistakes during their ISA journey, costing them both time and money. Here are six common ISA mistakes and how to avoid them.”
- Picking the wrong type of ISA
“You may assume ISAs are a one-size-fits-all account. That’s not the case as you need to pick the one that works best for you.
“There are six types of ISA, which means it’s easy to pick the wrong one for your savings or investments. It might be that you’ve opted for a Cash ISA, but you’re saving for the long term, and an investment ISA would be a better option. You can only hold cash in a Cash ISA, whereas investment ISAs can hold a range of shares, funds and bonds.
“You may have picked a Stocks and Shares ISA to save for the deposit for a first home, but you could have benefitted from the 25% government bonus available on the Lifetime ISA. Everyone loves free money but only Lifetime ISA holders get the extra cherry on the cake.
“Equally, if you’re saving for your child, paying into a Junior ISA might be better than saving the money into your own ISA. That’s because your child gets their own allowance in a Junior ISA, so there is no reason to share your ISA allowance with them.”
- Paying unnecessary costs
“It’s normal to pay some fees and charges with investing, but one ISA mistake to avoid is paying out too much, as ultimately this will eat into your returns.
“Make sure you’re not buying and selling investments too often. Many platforms will charge a fee every time to buy and sell – and these can add up over time. One option is to use regular investment services where dealing charges are often lower.
“Another way to cut charges is consolidating investments. If you have ISAs scattered all over the place you may find you can reduce fees by consolidating them in one place.
“For example, if you hold Nvidia shares in two separate ISAs and decide to sell out, you will pay two lots of dealing fees. Holding your ISAs in one place will also make them easier to manage as a portfolio.”
- Not using your allowance
“Everyone over the age of 18 can pay up to £20,000 into their ISA each tax year, with the Lifetime ISA capped at £4,000. Make sure you’re making the most of this allowance as much as possible, as if you don’t use it, you lose it – you can’t carry forward any unused allowances to future years.
“An ISA protects your investments from capital gains, dividend and income tax, so it’s the best place for your investments. All the wealth you create in the ISA is yours to keep and the taxman gets nothing.
“Investors with spare money to save and any unused ISA allowance for the current tax year should consider using it before the 5 April deadline.”
- Thinking you can only have one ISA at a time
“A lot of people don’t realise the rules have changed on ISA ownership. Historically, you could only pay new money into one ISA of each type in a tax year. There are now no limits on the total number of ISAs you can open in a tax year.
“The only exceptions are Lifetime ISAs and Junior ISAs, where you can only pay into one account of each type, every tax year.
“If you want to make use of this flexibility, just make sure you are keeping track of what you’ve paid in and where, to make sure you don’t go over your ISA allowance.”
- Paying too much in
“While everyone has a £20,000 ISA allowance, you need to make sure you don’t pay in more than that amount each tax year.
“This allowance is split between all types of ISA and all your accounts, which may be with different providers.
“Because you can have accounts with different providers, there’s no way for them to know everything you’re paying in, which means it’s down to you to keep track of your total contributions.
“If you do accidentally pay too much into an ISA, you shouldn’t attempt to fix it by taking money out of one account. Instead, call HMRC’s ISA helpline on 0300 200 3300 to explain the situation. They’ll work out which ISA payment breached the limit and reclaim the money for you.”
- Losing track of your old ISAs
“Unless you are a stickler for filing paperwork or take pride in maintaining spreadsheets, it’s easy to lose track of accounts, log-in details or savings pots over time.
“Forgetting about accounts also implies you aren’t monitoring what’s inside them. Some might be gathering dust, earning low interest, or the investments might no longer be right for you.
“It’s important that you take time to track down these accounts. Firstly, it’s your money and you want to get your hands on it. And secondly, if it’s in a Cash ISA it will likely be earning little interest if the account has been sitting there for a while. Equally, if it’s in investments you need to make sure they are right for you.
“The investment case for a stock might have substantially changed since you first bought it, or a fund might have gone off the boil and there are more interesting alternatives to consider.
“Dig out old paperwork, reset passwords and dive back into the accounts to see how much you have saved. Once you’ve done that you should consider transferring the money into one ISA, to make it easier to monitor and to reduce your admin, and potentially cut your fees, too.”
